Good day, ladies and gentlemen, and welcome to the Benchmark Electronics Incorporated Second Quarter 2017 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded. I’d now like to introduce your host for today’s conference Lisa Weeks, Vice President of Strategy and Investor Relations. You may begin.

Thank you, operator, and thanks everyone for joining us today for Benchmark’s second quarter 2017 earnings call. With me this afternoon, I have Paul Tufano, CEO and President; and Don Adam, CFO. Paul will provide introductory comments and Don will provide a detailed review of our second quarter financial results and third quarter outlook. We will conclude our call with a Q&A session. After the market closed today, we issued an earnings release highlighting our financial performance for the second quarter and we have prepared a presentation that we will reference on this call. The press release and presentations are available online under the Investor Relations section of our website at www.bench.com. This call is being webcast live and a replay will be available online following the call. Please take a moment to review the forward-looking statements advised on Slide 2 in the presentation. During our call, we will discuss forward-looking information. As a reminder, any of today’s remarks that are not statements of historical facts are forward-looking statements, which involve risks and uncertainties described in our press releases and SEC filings. Actual results may differ materially from these statements and Benchmark undertakes no obligation to update any forward-looking statements. The company has provided a reconciliation of our GAAP to non-GAAP measures in the earnings release, as well as in the Appendix of the presentation. With that I will now turn the call over to our CEO, Paul Tufano.

Thank you, Lisa, and thank you for joining our second quarter earnings call. I am extremely pleased with our performance in the second quarter. Once again we met or exceeded all of our commitments. Revenue for the quarter was $617 million, up 6% year-on-year. This is the second consecutive quarter of year-on-year growth. And as we look at the drivers of that growth, it was really fueled by our Test & Instrumentation sector, where our broad engagements where semiconductor capital equipment manufacturers is delivering handsome year-on-year growth. We also saw good growth in our Aerospace and Defense sector where we had broad growth with a number of existing accounts. And we also saw computing once again grow on a year-on-year basis primarily due to our engagements in the storage arena. Gross margins came in at 9.4%, 30 basis point year-on-year improvement, our GAAP margins were 4.1%, again quarter-on-quarter improvement and we had EPS of $0.38, $0.03 improvement year-over-year and 4% on a quarter-on-quarter basis. If you look toward our capital, working capital and more importantly our cash conversion cycle days, the company did very well this quarter posting 65 days of cash cycle days. That’s below our anticipated target of 70 days in both the quarter-on-quarter and year-on-year improvement. Result of that is that we generated $15 million of cash from operations as that brings us to $93 million year-to-date as you remember correctly we guided between $125 million and $150 million for the full year, so we’re well on our way to meeting that objective. And finally, our ROIC was 9.5%, that’s a 50 basis point quarter-over-quarter improvement and we anticipate further improvements in ROIC in the third quarter. If you turn to Slide 5, as we have said in the past, revenue growth is essential for us to…

Thank you, Paul, and thanks for everybody for joining today’s call. We’re going to start on Slide 9 and I will provide a quick recap of our second quarter income statement. Our revenues were $617 million, which exceeded the high end of our guidance and we’re u 6% year-over-year again which is the second straight year over – second straight quarter of year-over-year growth. In the second quarter, our non-GAAP operating margin was 4.1%, which increased from the first quarter driven by our higher revenues. Our non-GAAP EPS of $0.38 was above the high end of our guidance of $0.31 to $0.35 and again primarily really driven by better absorption and higher-than-expected revenues. We have a couple of items that are included on our GAAP EPS numbers of $0.34. We have $1.5 of restructuring and other costs. We also had $700,000 of recovery from the sale of inventory that we had written down in the first quarter due to a customer insolvency. For the quarter, our ROIC was 9.5% up 50 basis points from the last quarter and our long-term target is 12%. Now let’s turn to Slide 10, I will give you a quarterly – review our quarterly results by market sector. Industrial revenues for the quarter were up 5% quarter-over-quarter due to increased demand from our customers. Industrial revenues were down 14% year-over-year, primarily due to softness across several of our top customers. On A&D, revenues were down 4% quarter-over-quarter due to demand mix and qualification issues. A&D revenues grew 16% year-over-year, driven by increased defense demand. Our medical revenues were flat quarter-over-quarter and down 6% year-over-year from lower demand across several of our top customers. On Test & Instrumentation, our revenues grew 16% quarter-over-quarter and 47% year-over-year from strong demand in our precision machining business, serving the…

Thank you. [Operator Instructions] And our first comes from Steven Fox of Cross Research. Your line is now open.

Hi good afternoon. My first question just has to do with the end markets. So it looks like you had some sequential improvement in industrial, but still down. I was just curious first of all with how much of the improvement was sort of credit to the market versus, say your own new program wins or the customers gaining share. And then a similar question on Medical, where it seems to be struggling a little bit more. Why is it going to turnaround in the next quarter according to the guidance?

Okay, Steve this is Paul. Let's take Medical first. I mean, obviously, Medical revenue has not been growing as we had hoped it to be. But clearly, medical is a function of kind of the programs you have and where they are with regard to FDA certification and therefore their ability to ramp. So we believe that we'll see growth in the third quarter, primarily because some of the programs which have been waiting FDA approval like we expect to begin to ramp, and as they do so, it will drive additional revenue growth. So the Medical space is an interesting one, because you have to have a lot of bets on the table. It takes a long time from a booking to a revenue realization. And depending on the level of FDA certification required, it is elongated. So that's why we are so driven to get as many different types of technologies and capabilities out there to get higher bookings in the Medical space because you need to have a lot of chips on the table if you're going to get some wins. And that's how we view the Medical space. In Industrial, look Industrial are our product, our engagements, are probably more limited as we said before in process control and energy. And one of the things we have to do is diversify our engagements in Industrial. We'd have more end market diversification to allow us to continue to grown even when you have different market oscillations in end markets. So hopefully, that answers your question.

Yes, it does. Thank you for that. And then just, Paul, you mentioned a bunch of interesting technical points that you're working on. I guess I was most curious if you can expand a little bit on the RF side. You mentioned maybe investing a little bit more on the components, modules assemblies. Is there any broader view you can put around that as to why you reached the conclusion, and whether that would involve acquisitions, or is there something that you can do internally? Thanks.

So I'm not sure we've talked about it at length. We have a filter business that does high-end filters, right? And so as we look at future growth and demand in Aerospace and Telco markets, what is going to be really important going forward is high signal integrity as it relates to the move to 5G for telco. And in the area of defense communications and EM. Now we believe we have capabilities at both Lark as well as other parts of the company that if we couldn’t bring them together, we can serve these customers quite well and will grow with that. And so we're just concentrating our efforts to expand. And it will start with more RF components and will bridge into modules and the like. And I think this will be a natural extension of our RF capabilities, where we marry the spare capabilities previously in different parts of the company into one and we give a higher value proposition to our customers. And the world of 5G will be upon us and if that happens in 2020, we have to position to help our customers to realize it.

Great, that’s very helpful. I appreciate the color.

Thank you. And our next question comes from Jim Suva of Citi. Your line is now open.

Hi, thanks very much. It's great to see the revenue growth year-over-year. Paul, when we think about the initiatives you put in, specifically with salesforce, OpEx to kind of invest in the future harvest sales rate growth in the future. Can you help us with the September quarter guide? Maybe my math is wrong, but it looks like sales are decelerating year-over-year rather than accelerating? Or maybe my math is wrong, or my timing is off about when we should see an acceleration from the efforts put into place in the first half of this year?

Look Jim, I think that we always said 2017 is a transition year. And I'm pleased that we've seen revenue growth in the first two quarters of the year. Now the third quarter is normally down sequentially from the second, and that's embedded in our guidance. Now even with that, I believe you will see, depending on where we are in that range, year-over-year growth. It may not be as much as our previous two quarters, but I know that in the mid to the high [indiscernible] flat to positive year-on-year growth.

Okay, yes. And again I’m especially focused on the year-over-year growth to get rid of seasonality. But if you're putting in an additional SG&A and OpEx in the first half of the year, shouldn't we see an acceleration and year-over-year growth? And if so, when would we expect that to gain traction?

Alright. So look, when you put on additional go-to-market resources, right, depending on their level of understanding of the space and the Rolodex in the space, you can expect it's going to take them a couple of quarters before they even started gaining their first booking. And from the time you get a booking, from the time you realize the revenue, depending on the sector, it could be anywhere from 90 days and probably easiest ones which would be compute and telco, up to 180 days to 240 days for Medical. So that's why it's so important to prime this pump. First of people to drive bookings, will drive revenue. And I wish it was a more shorter cycle, but this is in our industry.

Great thanks so much for the detail. That’s greatly appreciated.

Thank you. And our next question comes from Sean Hannan of Needham & Company. Your line is now open.

Yes, good evening. Thanks for taking my question here. I have a few of them. The first one, Paul, you had mentioned that there were some component shortage impacts that are effectively embedded within the guidance, particularly affecting computing for September. So I just want to see if we can get a little bit more clarity around that in terms of if we could perhaps frame some quantification. And then as part B to that, were there any impacts that we actually realized in this June quarter we just reported?

So Sean look, I think, Don made that comment. And I think it really references NAND memories. If you look at the market for NAND memory today, it is pretty tight. And in fact, unless you have reserved capacity, the lead times are really elongated. Now NAND memory use a lot of computing products. And so whether or not you get enough allocation and the timing of that allocation to be put in the product and realize in terms of revenue is the real issue. So that was really the reference to components shortages.

Okay. And I thought [ph] that. I didn't know if this is something that ultimately impacting liability go and ship $10 million of revenue. I mean, if it's worth noting, I'm sure there's probably a quantified impact, and didn't know what that might be.

Well like I mean, at the end of the day, it will impact certain areas in storage arena, where we have a lot of exposure to storage. So could we have shipped more product in the second quarter if we had more supply of some components? The answer is yes. It's a watch item for us as we go through the second half of the year. And specifically in the third quarter. And I think if you look at the entire supply chain in terms of a variety of different components, it's getting tighter across the board. And you need to just watch it for us. And we're being very, very circumspect as to what it means to our customers and what it means to reserve and capacity.

Okay. Thank you. And then shifting over to the wins, great job on what you've aggregated for a lot of these nontraditional markets. Just trying to get a little bit more clarity then in terms of your expectations when you look at that grouping of wins. Would these be more of a revenue impact in 2018? Or based on the mix, is this even more of a bias toward 2019? Thanks.

It's a function of where it is. So obviously, the stuff that's in Medical and A&D, the time to realization is a little longer in terms of revenue. For the Medical products, because where they stand with regard to FDA registration, kind of spoke about that earlier. In the A&D products, it is kind of where they are with regard to funding levels from the government, right, and the like. So those two sectors will probably have the longest booking to revenue realization time frame. In some of the other areas, especially industrial we can probably get it sooner. And in the Test & Instrumentation area we can get it sooner. So it's a mix. That's why as we look at how we have to hunt and how we have to put out – get our bookings to achieve the target level, not much the aggregate, that's important, it's the composition that it is. Because we have to have enough composition so that we're not over rotating the revenue two years away. And that's the big change in focus that we have in the company today. We have to make sure we have balanced bookings that translates revenue growth. So you have to understand the realizations for each booking sector. A long winded answer, I apologize.

Okay, last question here. December, typically your strongest quarter of the year. Anything just in terms of forward thoughts that really would prevent that type of dynamic this year? Or is this looking to lineup per typical from what you're seeing thus far?

Look – our focus is on the third quarter. I'm hopeful that the fourth quarter follows seasonal patterns.

Okay. Thanks for taking my questions.

Thank you. [Operator Instructions] And our next question comes from Mitch Steves of RBC Capital Markets. Your line is now open.

Thanks for taking my question guys. I just had two. So first of all, kind of return to the guidance. There’s two quarters in a row now where you guys are coming at the high end of the range. And before that, you actually came in above the midpoint. So I'm just curious if there's any sort of internal change in how you guys think about giving guidance broadly on a quarterly basis?

No, look, Mitch, not really. I mean it’s our job to give you our most balanced view what could happen, and that's what we do. Now I will tell you, right, as you expect any operator from executive to do, we are driving our organization to always deliver at the high end or better. And this is where execution becomes important. As long as the market isn’t – was not blowing in your face, if you can execute, you should do better. And so we get a balanced view on guidance, but I look at how well the company performs or how well we execute. And that execution is how well we do on chasing parts to get to customer demand. It's how we can reduce inventory. It's how we can do those things that drive margin and asset velocity. And if we do our job well, we should do better than we think we can do. Not always the case, but if we do it well, we should do better than we think we can do.

Got it, thanks. And then just one on the customer side, I know you had mentioned semi-cap in there. Is there any way to provide any more color on exactly what's going on there? It sounds like maybe this will slowdown in the back half. Just what are the kind of dynamics on the customer side there?

Well, first off, we have – well, we enjoy a broad set of engagements with a variety of semi-cap customers. So that is, I think, a strength of the company. And as you know, semi-cap demand is a function of end market demands, right, both in a variety of traditional technologies and new technologies. And I think that if we were to step back and look at overall semi-cap demand based on the growth of data center requirements for content delivery and deep analytics, LCD television demand, memory demand and a whole variety of other things, the secular growth rate for that industry is probably better than it has been in the past. And so while you might get a little bit of oscillation quarter-on-quarter, on balance, I think that industry will continue to grow faster than traditional norms over the next year, couple of years. And we are extremely pleased to be engaged with customers that are growing.

Perfect, thank you.

Thank you. And this does conclude our question-and-answer session. I would now like to turn the call back over to Lisa Weeks for any further remarks.

Yes, thank you all for joining us on our call today. And we will be available post this conference call for follow-up questions today and tomorrow. Please don't hesitate to reach out. Thank you, and have a great day.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.